Can I Take Out Life Insurance on Someone Else?

It is possible to obtain a life insurance policy on another individual, a practice that allows for financial protection in various relationships. This process, however, is subject to specific requirements designed to prevent misuse and ensure ethical considerations are met. Understanding these conditions is important for anyone considering such an arrangement.

Establishing Insurable Interest

A fundamental requirement for acquiring a life insurance policy on someone else is establishing an “insurable interest.” This legal concept signifies that the policyholder would experience a genuine financial loss or hardship if the insured individual were to pass away. This requirement distinguishes legitimate financial planning from speculative wagering on a person’s life, which is prohibited. Without a demonstrated insurable interest, insurance companies will not issue a policy, and any policy issued without it may be deemed void.

Insurable interest exists in relationships where financial interdependency is present. Spouses often have an insurable interest in each other, as do parents in their children and adult children in their parents, especially if there’s financial reliance or responsibility for future expenses. Business partners possess insurable interest in one another, as the death of a key individual could severely impact the business’s financial stability. Creditors can demonstrate an insurable interest in debtors, ensuring loan repayment in the event of the debtor’s death, provided the insurance amount is reasonably related to the debt.

The Requirement of Consent

Obtaining the explicit consent of the person to be insured is a necessity when securing a life insurance policy on their life. This requirement protects an individual’s privacy and autonomy, ensuring they are fully aware of and agree to the insurance arrangement. Insurers mandate that the proposed insured sign the application form, confirming their voluntary agreement to the policy.

This consent must be genuine and informed. The only exception to this rule is when a parent purchases a policy for a minor child, where the parent can provide consent on the child’s behalf. For adults, attempting to obtain a policy without their knowledge or signed consent is illegal and can lead to severe legal consequences, including the invalidation of the policy. The signed consent serves as a safeguard against potential fraud.

Applying for the Policy

Once insurable interest and consent are established, the application process involves gathering information about the proposed insured. The application form requires personal details such as full name, date of birth, and Social Security number. Comprehensive medical history is important, including current health status, past diagnoses, medications, and any previous surgeries. Information about lifestyle habits, such as smoking, alcohol consumption, and participation in hazardous hobbies, is requested to assess risk.

Financial information about the proposed insured, including income, occupation, and net worth, may be required to ensure the coverage amount aligns with their financial circumstances and the policyholder’s needs. Often, a medical examination is part of this stage, where a paramedical professional collects measurements like height, weight, blood pressure, and samples for blood and urine tests. This forms the basis for the insurer’s assessment.

What to Expect After Application

After the completed application and information are submitted, the insurer initiates the underwriting process. Underwriting involves a review of all collected data, including medical exam results, health records, and financial information, to assess the risk of insuring the individual. Insurers also use external databases, such as the Medical Information Bureau (MIB), prescription history, and motor vehicle records, to verify the accuracy of the application details. This evaluation allows the insurer to determine the appropriate premium rates and the terms of coverage.

Following the underwriting review, the insurer will make a decision on the policy. The application may be approved as submitted, approved with modifications (such as a higher premium or reduced coverage due to identified risks), or declined. If approved, the policy contract is then delivered to the policyowner. Upon delivery, the policyowner has a “free look” period to review the terms and cancel for a full refund if desired. Regular premium payments are then required to keep the policy active.